Home builder Stocks Surge

Rising Rates

As of yesterday, the rate on the 10 year T-note had risen to 4.86% and it appeared to be heading for 5%. The stock market does not like rising interest rates. Rising rates means that cash is becoming more valuable. In fact, we may now be seeing the end of the "cash is trash" period. The yields on the 91 day T-bills are now pushing over 5%. That's better than double the 1.8% yield on the overpriced S&P 500.

Roughly $2.3 trillion in adjustable rate mortgages are due to be reset this year, and it's hardly bullish that these mortgages will be reset in an atmosphere of rising interest rates. This is hardly the condition that the experts were predicting late last year. In fact, the smartest economists and money-managers were talking about declining rates in 2007. So far, it hasn't worked out exactly that way.

The sale of existing housing dropped 8.8% in 2006, it's biggest drop in 17 years. Then today we hear that more than 1.2 million homes were foreclosed in 2006, up 42% over the previous year. With interest rates now rising, the situation becomes rather interesting.

Real estate billionaire, Sam Zell, has put his entire real estate empire up for sale. Now why did he do that at this particular time. Then in today's paper billionaire Kirk Kerkorian has his Beverly Hill home for sale. This 30 acre property was put up for sale last year at a price of $25 million. The property didn't sell. Now Kirk has lobbed $7 million of the price. The place is yours for just under $18 million.

Rates now rising, the rationale for holding T-bills improves. The short T- bills now yield over 5% free of state taxes, and when you buy a T-bill you're guaranteed to get your capital back within three months. Stocks are always competing with bills and notes. When you buy stocks you receive historically low dividends, and you're not guaranteed that you'll get your money back when you want to sell.

Big money wants:

1.)Safety first

2.)Income second

3.) Possible appreciation third

That's a good thesis always to keep in mind.

Contra Costa: Loan defaults rose by 180 percent

About 1,000 more mortgage default notices went out to Contra Costa County homeowners, while another 700 and about 500 showed up in Alameda and Solano county mailboxes respectively, signaling the highest rate of foreclosure activity in eight years, a real estate information service reported Wednesday.

Defaults rose by 179.3 percent, or 970, in Contra Costa County 157.2 percent, or 717, in Alameda County and 163 percent, or 484, in Solano County.

A notice of default is the first step in the foreclosure process, usually after a few missed payments.

Last month, the Center for Responsible Lending, reported that high-risk loans and "exploding ARMs" that have a steep payment increase after two years could lead to a foreclosure crisis. The center projected that about 19.4 percent of all subprime loans issued in 2005 and 2006 would end in foreclosure.

The Economy: some thoughts

The world (Asia in particular) is producing far too much in the way of goods and merchandise. In turn, US stores are piled up to their ying-yang with merchandise. Really? Then why isn't this production of "too much" merchandise deflationary?

The reason it isn't deflationary is because there's even more money than merchandise being created. The ocean of fiat money is overcoming the river of production. It's a situation that's never been seen before. And it's the product of two phenomena -- the rapid entrance of one-third of the world into the global economy. And the fact that every nation (again, the Asians in particular) wants a "cheap" competitive currency. And the way to make your currency cheap is to print "too much" of it.

The net result is that the price of everything -- real estate, stocks, bonds, commodities -- is floated higher. The result of all this "levitation" is that yields are ridiculously and synthetically low. Stocks are overpriced and provide micro-yields. Bonds are overpriced and provide unnaturally low yields.

Low returns mean that projected income for insurance companies, annuities, pensions plans, are all going to run short of needed or promised money. Everybody is forced to speculate in order to make up the difference. Unless, of course, the whole inflationary balloon collapses and securities return to known or historical values.

Since value investing is so difficult today (lack of great values), investors of necessity are speculating on growth. The result -- who cares about values or dividends, just find me stocks that are going to grow.

What's the scariest phrase in the economic world today? I'll tell you what it is -- it's regression to the mean. They can't let this happen. But how do you hold it off? You continue to inflate.

Following are some of Pyford's, a UK economist, conclusions --

"Corporate profit margins are at or close to record highs and will mean-revert. The process is likely to start this year. Share-markets are unprepared for this outcome.

"Property is in a bubble in many countries. It will not remain so.

"Bond prices make no allowance for any inflationary increase. This is overly optimistic.

"Credit spreads are around record lows. This is overly optimistic.

"Geopolitical problems have gone away.

"China will never stumble.

"Private equity financiers know something the rest of don't.

"Americans, Australians, Canadians, New Zealanders and the British don't really need to save anything out of current income. This is not just overly optimistic but delusional.

"The world has changed, and we simply don't 'get it.' Or to put it another familiar way, 'this time it's different.' We'll let you decide on this one."

"Real Estate Timing Letter" by Campbell

The latest "Real Estate Timing Letter" by Robert Campbell (858-481-3236) just came out. This is a unique and excellent technical-fundamental report by a real estate expert -- Robert was one of the first to call the top of the real estate boom.

Campbell believes we're still at the beginning of a long bear market in real estate. Here are a few of his reasons --

"Real estate downturns typically last 4 to 6 years after housing prices peak out."

"A huge wave of ARMSs are scheduled to be re-priced in 2007, causing a significant rise in mortgage payments and an acceleration in foreclosures."

"A credit crunch is looming on the horizon, which make mortgage financing harder to get. If you contract the availability of credit, the housing bubble deflates.

"After rising by a spectacular 200% during the boom, history almost assures us that the resultant fall in housing will be equally spectacular during the bust."

This is a bearish view of the real estate situation. The Fed will want to counter the fragile real estate situation by flooding the markets with liquidity. Money will be, and is, available everywhere in enormous quantities. The banks are choking on liquidity. And although they don't want to -- if need be (to "levitate" housing), the Fed will again lower short rates. In my opinion, the Fed has been concentrating on housing ever since housing topped out last year. The Fed considers a soft landing for housing an absolute must, and the way to prevent a housing bust is to make money abundantly plentiful.

Marin County housing prices: down 5%

The median price of a single-family home in Marin slipped to $855,000 in December, down 5 percent from the previous year and about 8 percent from November, an industry research firm reported Wednesday in the Marin IJ newspaper.

The December decline was the steepest in the nine-county Bay Area, where prices remained lodged in a generally flat pattern.

Marin County housing prices NEVER go down I thought???

Forclosures in Ca. **Up 10 times**

The number of foreclosures that lenders are taking back in California has increased from an average of 32 a day in August 2006, to 300 a day in December 2006. In dollars that’s an increase from $13.3M per day to $45.9M in four months. So far, for the first week of 2007, the numbers are 161 homes and $63.8M–per day.

If we extrapolate the numbers from the first week of January for the month, we estimate $1.3 billion in loans will return to lenders in January. If the pattern of previous months followed, this number is likely conservative; the rate of increase has tended to rise week by week during previous months.

That’s right, lenders are on track to take back over a billion dollars worth of loans a month in January in California alone. A billion here, a billion there. That may soon add up to real money.

Gold and the Dow

The Dow-to-gold ratio hit a high in favor of the Dow in July of 1999. At that time, one share of the Dow would buy 43.85 ounces of gold, an all-time record in favor of stocks or financials over gold or tangibles (real money). Since then the ratio has been declining in favor of gold. As of yesterday, the Dow/gold ratio had declined to 20.38, meaning that one share of the Dow would now buy only 20.38 ounces of gold, a decline of over 52% in the ratio from the 1999 high.

A critical question is how far this ratio in favor of gold might descend. In January 1980, at the height of the gold boom, the ratio sank to a record low of 1.04, meaning that the Dow would buy only one ounce of gold. I don't know whether we will ever again see a one-to-one ratio -- in which one share of the Dow will buy only one ounce of gold. But in this business, as you well know, anything can happen.

Ian Frazier, who writes the fine advisory, Deliberations out of Toronto (416.964.1359), presents the Dow/gold cycle in a fascinating way:

"Think of the Dow as a tradable ETF. In August, 1929, your grandfather sold one unit of the Dow and bought 18 1/2 ounces of gold. Three years later, when the Dow/gold ratio bottomed at 2:1, he sold those 18 ounces of gold and bought back 9 units of the Dow with the proceeds.

"Those 9 units reached another peak in 1966 when the ratio hit 28:1. Now your father exchanged those 9 Dow units for 252 ounces of gold. In January 1980, the ratio got to an almost unprecedented ratio of 1:1, so he converted those 252 ounces of gold into 252 units of the Dow.

"Come 1999 with the ratio at an unprecedented 43.85-to-1 level, the prudent family converted those 252 units of the Dow into 11,050 ounces of gold! No trades were based on the price of gold or the level of the Dow..... It's just a simple question of how many ounces of gold is the Dow trading for in the market.

"This little fictional fable started with 1 unit of the Dow at a peak in 1929. Two tops, two bottoms, and five trades later it's 11,050 ounces of gold in 70 years."

Contra Costa Supply up

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Stock market cycles

Followers of stock market cycles are wondering, "What happened to the four-year cycle?" And the answer is that it's either disappeared or it lies somewhere ahead. I have written earlier that since the mid-1800s, there has always been a bear-market correction in the 6-7 years of each decade (i.e., 1946-47, 1956-57, 1966-67). We've escaped the year 2006 without the semblance of a correction or bear market. The question now is whether we can get though 2007 without a costly decline.

Contra Costa Housing: Over 1.2 mil on decline

The current seasonal decline of the overall inventory level in Alameda and Contra Costa counties. What's news worthy, yet no one's heeding, is the decline of the number of daily new listings over $1.2 millions, relative to the overall number of new listings. Comparing to the same month a year ago, the number of high-end new listings in December declined more than 1%, from 5.79% to 4.68%. That's a significant deviation. So, what's the implication to the housing market as well as the overall economy?

Home builders: Cancellation orders

the supposed modest increase in new home sales, for example, is that the Census Bureau does not adjust for cancellations in its compilation of house sales, which in a soft market like this one not only overstates sales, but understates inventory.

Usually, cancellations run only about 15% of orders for publicly owned home builders. However, cancellations have soared this year. And Doug thoughtfully sent along the third-quarter rate for each of the leading home builders. Here they are: Centex (ticker: CTX), 37%; DR Horton (DHI), 40%; KB Home (KBH), 53%; Lennar (LEN), 31%; Pulte Homes (PHM), 36%; Beazer (BZH), 57%; Hovnanian (HOV), 35%; MDC Holdings (MDC), 49%; and Standard Pacific (SPF), 50%.
Source: Barrons